Applied Economics

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Financial inclusion and poverty: a tale of forty-five

thousand households

Sefa Awaworyi Churchill & Vijaya Bhaskar Marisetty

To cite this article: Sefa Awaworyi Churchill & Vijaya Bhaskar Marisetty (2019): Financial
inclusion and poverty: a tale of forty-five thousand households, Applied Economics, DOI:
10.1080/00036846.2019.1678732

To link to this article: https://doi.org/10.1080/00036846.2019.1678732

Published online: 18 Oct 2019.

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APPLIED ECONOMICS
https://doi.org/10.1080/00036846.2019.1678732

Financial inclusion and poverty: a tale of forty-five thousand households

a
Sefa Awaworyi Churchill and Vijaya Bhaskar Marisettyb
a
School of Economics, Finance & Marketing, RMIT University, Melbourne, Australia; bSchool of Management Studies, University of Hyderabad,
Hyderabad, India

ABSTRACT KEYWORDS
Using a new nationally representative survey data covering approximately 45,000 Indian house- Financial inclusion; banking;
holds, we examine the effects of financial inclusion on poverty. We construct a multidimensional credit; insurance; poverty
indicator of financial inclusion and examine the effects of financial inclusion on multiple measures JEL CLASSIFICATION
of poverty including the household Poverty Probability Index (PPI), household deprivation scores, G21; G22; I30
and poverty line. We find that financial inclusion has a strong poverty-reducing effect. This finding
is consistent across the different measures of poverty used, and alternative ways of measures
financial inclusion. These results underpin the importance of financial inclusion and the need for its
promotion across countries.

I. Introduction across India, we examine the impact of financial

inclusion on poverty. India makes for a unique sam-
The literature on the impact of finance on poverty
ple to explore this relationship in detail particularly
remains inconclusive. Studies have shown that
because it hosts the world’s largest intervention and
finance promotes growth, however, as noted by
programmes aimed at increasing financial inclusion
Beck, Demirgüç-Kunt, and Levine (2007), an estab-
(Günther 2017). Since the 1970s, the Indian govern-
lished positive effect of finance on growth does not
ment have put in various efforts to promote financial
necessarily mean finance helps alleviate poverty.
inclusion as a way of addressing poverty. One note-
Economic growth may be characterized by uneven
worthy effort was the introduction of a licencing rule
distribution of income which causes poverty,
by the Reserve Bank of India in 1977, known as the
although it can also be associated with falling
1:4 rule which required existing banks to open four
inequality and poverty. Specifically, if finance via
branches in unbanked (or excluded) locations in
economic growth increases the income of the rich
order to get a licence for operation in already banked
and further worsens the distribution of income,
locations (Burgess and Pande 2005; Chakravarty and
then finance will not help the poor. Conversely,
Pal 2013). The introduction of the 1:4 licence rule
finance may help the poor if it promotes inclusive-
ensured that issues of financial exclusion were ade-
ness and helps the poor overcome challenges asso-
quately addressed in rural and semi-urban areas, and
ciated with investments. Against this background,
although this rule was abolished in the early 1990s,
a growing body of literature has sought to empiri-
several other banking and financial sector reforms
cally examine the impact of finance on income
including the introduction of lending targets, forma-
distribution on the one hand (see, e.g. Ang 2010;
tion of self-help groups, interest rate deregulation,
Clarke, Xu, and Zou 2006; de Haan and Sturm
nationalization of private banks and deregulation of
2017; Shahbaz, Bhattacharya, and Mahalik 2017),
foreign banks, among others, were introduced to
and on the other hand, on poverty (see, e.g. Akhter
ensure operational flexibility of banks as well as
and Daly 2009; Beck et al. 2008; Chibba 2009;
promote financial inclusion (Burgess and Pande
Jalilian and Kirkpatrick 2005).
2005; Cole 2009; Mohan and Ray 2017).
Our study seeks to contribute to the literature on
These efforts to promote financial inclusion have
finance and poverty. Specifically, using a unique
been deemed successful. According to statistics
household data on approximately 45,000 households
from the Global Financial Inclusion database, as

CONTACT Sefa Awaworyi Churchill sefa.churchill@rmit.edu.au School of Economics, Finance & Marketing, RMIT University, Melbourne, Australia
© 2019 Informa UK Limited, trading as Taylor & Francis Group
2 S. A. CHURCHILL AND V. B. MARISETTY
of 2014, 53% of Indians had an account which
represents an increase of 18% from 35% in 2011
(Demirgüç-Kunt et al. 2015). Further, Prime
Minister Modi’s launch of the ‘Pradhan Mantri
Jan Dhan Yojana’ in 2014 which had the target of
granting 75 million bank accounts was exceeded,
and as of November 2016, over 260 million
accounts were opened (Günther 2017). Despite
the success in promoting financial inclusion in
India, a fundamentally important question remains
unanswered: does financial inclusion enhance well-
being and alleviate poverty in India? Very few
studies have empirically examined this research
question.
Burgess and Pande (2005) used state-level panel
data on rural bank expansion as well as credit and
savings share to examine the impact of financial
inclusion on poverty. They found that bank branch
expansion across rural unbanked areas in India
helped reduce poverty. More recently, Inoue and
Hamori (2012) examine the impact of financial
deepening on poverty using an unbalanced panel
of 28 Indian states. They measure financial deepen-
ing as the credit and deposit amounts associated
with a region’s commercial banks as share of regio-
nal output. They found evidence that financial dee-
pening decreased poverty as measured by state-
level poverty headcount ratio. Several other studies
on the subject have used macro-level data either at
the country-level, state-level or district-level (see,
e.g. Bell and Rousseau 2001; Binswanger and
Khandker 1995; Sehrawat and Giri 2016).
Some studies have also examined the implica-
tions of financial inclusion with a focus on African
countries particularly Nigeria (see, Aideyan 2009;
Dimova and Adebowale 2018; Seck, Naiya, and
Muhammad 2017). These studies have often
focussed on the impact of access to finance or
microfinance on expenditure and consumption.
A closely related study is Dimova and Adebowale
(2018), which use data from the General
Household Survey for Nigeria and find evidence
to suggest that access to finance increases income
inequality but improves household welfare.
Going beyond studies that have focussed on
India and Nigeria as case studies, most studies
that examine the relationship between finance and
poverty, in general, tend to focus on cross-country
data (see, e.g. Beck, Demirgüç-Kunt, and Levine
2007; Beck et al. 2008; Levine 1998). However,
while useful inferences are drawn from these stu-
dies, the use of macro-level data cannot provide
nuanced and detailed insight into how individuals
and households are influenced by their inclusion or
exclusion from the financial system. The use of this
micro data is important as it helps shed light on
how households and individuals benefit from
financial inclusion.
A number of studies use Indian micro data but
focus on different aspects of financial inclusion. For
instance, Ghosh and Vinod (2017) examine the rela-
tionship between financial inclusion and gender to
ascertain whether genders matters for financial
inclusion. Accordingly, they examine financial inclu-
sion as an outcome variable. Swamy (2014), on the
other hand, uses household survey data to examine
gender variations with regards to how financial
inclusion programs impact on various development
outcomes including income, expenditure and food
security, among others. A related strand of literature
focusses on the role of remittances in alleviating
poverty. International remittances are an impor-
tance source of finance for Indian, with over
$79 billion dollars in 2018 alone (World Bank
2019). Studies examining the impact of remittances
present mixed evidence on its effectiveness in alle-
viating poverty (see, Banga and Sahu 2013; Castaldo,
Deshingkar, and McKay 2012; Dey 2015; Imai et al.
2014). We contribute to these related bodies of lit-
erature by providing new evidence on the relation-
ship between financial inclusion and poverty. Thus,
we examine the impact of financial inclusion on
poverty in India using data from the Financial
Inclusion Insights (FII) 2016/2017 survey.
We measure financial inclusion multidimen-
sionally by taking into account access to banking
services (including savings, checking and fixed
deposit accounts), access to credit and access to
insurance. Based on the multidimensional financial
inclusion measure, we examine the direct effects of
financial inclusion on three measures of poverty
including 1) household deprivation scores based
on the multi-dimensional poverty index (MPI)
approach (Alkire and Santos 2010, 2) household
Poverty Probability Index (PPI), and 3) a binary
variable capturing households below (and above)
the poverty line. Our results suggest that financial
inclusion contributes to poverty reduction.
 APPLIED ECONOMICS 3

The remainder of the study is structured as fol-
lows. The next section provides a brief overview of
the empirical model and data used while Section 3
discusses the estimation strategies. In Section 4, we
present our empirical results. Section 5 concludes.
II. Data and empirical model
This study uses cross-sectional data from
InterMedia’s Financial Inclusion Insights (FII) pro-
gram. The FII surveys produce data across 12 coun-
tries including India that highlight trends in the uses
of financial services and technology. Our sample is
based on the 2016 survey for India which started in
September 2016 and ended in January 2017.
Accordingly, our dataset captures the most recent
trends allowing us to provide a more contemporary
view on the relationship between financial inclusion
and poverty. The dataset includes information on
household demographics, assets, poverty indicators
and financial behaviour among others. The survey
was carried out on 45,540 individuals located in
1050 communities (towns and villages).1 However,
accounting for missing observations, regressions
with the highest number of observations includes
44,705 households.
To examine the relationship between financial
inclusion and poverty, we specify the following
model:
Pi ¼ βFi þ γX i þ αi þ εi
where Pi is the measure of our outcome variable,
which is poverty for household i. Fi is the measure
of financial inclusion, while Xi is a vector of control
variables consistent with the literature on the deter-
minants of household poverty including age, gender,
marital status, household size, education, asset own-
ership, employment status, religion, household loca-
tion (rural vs. urban) and number of children in
household.2 The variable αi is a state-level dummy
variable that controls for unobserved State-level fixed
effect while εi is a normally distributed error term.
We adopt three measures of poverty given the
information available in our dataset. First, we use the
Poverty Probability Index (PPI) which is computed by
the FII team and readily available in the dataset. The
PPI is a measure of poverty, commissioned by the
Grameen Foundation, which provides scores for
households based on household characteristics to
determine the likelihood of a household living below
the national poverty line.3 In the case of India, the
poverty line in the FII is set at $2.50 per day and takes
into account current country conditions. The scores
on the PPI range between 0 and 100 with 0 represent-
ing the most likely poor household and 100 the least
likely poor household. Our second measure of poverty
is a dummy variable which captures households that
live below or above the poverty line of $2.50 per day.
Our third measure of poverty is based on the
multidimensional poverty index (MPI) developed
by the Oxford Poverty and Human Development
Initiative (OPHI) (Alkire and Santos 2010).
Consistent with the MPI, we consider three dimen-
sions of household characteristics including health,
education and living standards, and apply equal
weights of 1/3 to each dimension. We also weight
the indicators within each dimension equally.
Thus, with two indicators each under the health
and education dimensions, each indicator is
assigned a weight of 1/6 while each of the 6 indi-
cators under the living standard dimension
receives a weight of 1/18. Indicators available in
(1) our dataset which we use under each dimension are
reported in Appendix Table A1. The measure of
poverty used in our study is a deprivation score
which is assigned to each household based on the
indicators. The deprivation score per household is
calculated by taking the weighted sum of number
of deprivations and thus the score for each house-
hold lies between 0 and 1, where the score increases
as the number of household deprivations increases
until the maximum of 1 is reached when
a household is deprived in all indicators. The math-
ematical representation of the deprivation score is
given as;

1
These individuals include 16,874 respondents who agreed they were household heads. Note that some respondent did not answer the question about
whether or not they were household heads. However, every respondent included is surveyed about their household characteristics.
2
The common trend in the literature is to control for household head characteristics in household-level regressions, however, given that all respondents in our
survey are not households heads (or at least did not agree that they were household heads), we proceed to control for characteristics of respondents with the
assumption that these respondents to an extent, represent their various households. To ensure robustness of our results, we also examine our relationship of
interest in the household head sample only in Table A4 (i.e. the sample where respondents agree that they are household heads).
3
See https://www.povertyindex.org/about-ppi for details on the construction of the PPI.
4 S. A. CHURCHILL AND V. B. MARISETTY
di ¼ w1 I1 þ w2 I2 þ . . . þ wn In
where di is the household deprivation score, Ii ¼ 1 if
a household is deprived in indicator i and Ii ¼ 0 if
otherwise. wi is the weight attached to indicator i
P
with di¼1 wi ¼ 1.
Our measure of financial inclusion is consistent
with the existing literature and based on the World
Bank’s definition of financial inclusion which sug-
gests that a household or individual is considered
financially included when they have access to
affordable financial products that meet the needs
associated with transactions and payment, credit,
savings and insurance (World Bank 2018). This
definition is also consistent with the macroeco-
nomic literature which has often considered mea-
sures such as banked population, access to credit
and access to insurance as the core pillars of finan-
cial inclusion (Mialou, Amidzic, and Massara 2017;
Park and Mercado 2015).
We develop a multi-dimensional financial inclu-
sion index using an approach similar to equation
(2). We consider three dimension of financial
inclusion, namely, access to bank, access to loan/
credit and access to insurance.4 We assign each
dimension an equal weight of 1/3 and develop
a household financial deprivation score based on
equation (2). Based on a 0.5 cut off threshold, our
measure of financial inclusion takes the value 1 if
the household financial deprivation score is less
than 0.5, and 0 if otherwise. Such measures of
financial inclusion have been used in the literature
to capture a holistic perspective of financial inclu-
sion (see, e.g. Zhang and Posso 2017). We apply
equal weight to each of the three dimensions of
financial inclusion given evidence from the existing
literature which suggests the importance of each
dimension and how they complement each other.
The importance of access to credit and banking as
an indicator of financial inclusion is well-known in
the financial inclusion literature (Beck and
Demirguc-Kunt 2006, 2008). A related literature
on risk and poverty has also demonstrated the
critical role of insurance. Particularly, evidence
suggests that high-income risk is inevitable in
developing countries. Many households tend to
be vulnerable because of economic fluctuations,
4
In our dataset, access to bank captures households that have either a checking, savings or fixed deposit accounts.
(2) climatic risks and several individual-specific shocks
(Dercon 2005). Thus, as access to finance is argued
to ease household constraints associated with credit
while access to insurance eases constraints asso-
ciated with risks. Accordingly, consistent with the
literature (see, e.g. Zhang and Posso 2017), we
apply equal weights to the three dimensions of
financial inclusion. However, for robustness, we
also use the individual indicators that are included
in the financial deprivation index in our regres-
sions. Appendix Table A2 presents details of the
indicators used while Table A3 presents a descrip-
tion and summary of variables used in the study.
III. Estimation techniques
To estimate Equation (1), we first apply ordinary
least squares (OLS) techniques for regressions
involving PPI and deprivation scores, and logit
estimation techniques for poverty line regressions.
These constitute our baseline results on the effects
of financial inclusion on poverty. However, it is
possible that Equation (1) may suffer from endo-
geneity given the potential for reverse causality
between poverty and financial inclusion. Thus, to
address this problem and ensure the robustness of
our results, we conduct two sets of additional ana-
lysis that apply: 1) the two-stage least squares
(2SLS), and 2) propensity score matching (PSM).
For 2SLS regressions, we use the average time (in
minutes) taken by a household member to get to
the nearest financial institution. We argue that the
time taken to reach the nearest financial institution
which provides access to financial services will
influence financial inclusion given that people
take into account the time factor before making
decisions to (or not to) avail financial services.
Thus, we expect a correlation between time to
financial institution and financial inclusion. The
exclusion restriction is that the time variable affects
household welfare (i.e. poverty) only through its
effects on financial inclusion (i.e. access to credit,
savings, insurance, etc.). We run standard 2SLS
instrumental variable (IV) regressions using this
instrument, and to further ensure robustness and
increase the predictive power of the instrument, we
adopt the Lewbel (2012) 2SLS approach which

combines both internal and external instruments.
The Lewbel (2012) approach relies on heteroske-
dasticity to construct internal instruments, and has
been used in the literature for robustness check on
finding using conventional IVs or when external
IVs are either unavailable or weak (see, e.g.
Awaworyi Churchill and Mishra 2017; Mishra
and Smyth 2015).5
As an additional approach to address endogene-
ity, we also use PSM. PSM can be used to determine
the average effect of the treatment (in our case
households that are financially included) on our
outcome variable (poverty). PSM has been effec-
tively used in the literature to address endogeneity
in non-experimental data (see, Awaworyi Churchill
and Smyth 2017; Dehejia and Wahba 2002; Zhang
and Posso 2017), and thus in our case, it can help
draw causal inferences about the effect of financial
inclusion on poverty. We apply Rosenbaum and
Rubin (1983)’s PSM technique and consistent with
discussions in the literature which encourage the
use of different matching algorithms in PSM (see,
e.g. Caliendo and Kopeinig 2008), we employ the
nearest neighbour, radius, kernel and local linear
regression matching methods.
IV. Empirical results
Table 1 presents baseline results for the effects of
financial inclusion on poverty. Columns 1, 2 and 3
present results for effects on PPI scores, household
deprivation scores and our binary variable capturing
households above the poverty line, respectively. In
what follows, we interpret our results focusing on
standardized coefficients only given that they are
comparable across estimations types and variables.
From Column 1, we observe that a standard
deviation increase in financial inclusion is asso-
ciated with a 0.026 standard deviation increase in
reported PPI scores. From Column 2, a standard
deviation increase in financial inclusion is asso-
ciated with a decline of 0.017 standard deviations
in the level of household deprivation. Lastly,
a standard deviation increase in financial inclusion
is associated with an increase of 0.160 standard
5
See Lewbel (2012) for details.
6
These results are consistent with those reported for the sub-sample where respondents are household heads (Appendix Table A4).
7
F-statistics from first stage regressions suggest that our instruments used in both specifications are not weak.
APPLIED ECONOMICS 5
deviations in the number of households living
above the poverty line.
As discussed previously, increasing trends in PPI
scores suggest better performance in terms of pov-
erty while decreasing trends in household depriva-
tion scores suggests that same. Thus, our results
suggest that across all columns, financial inclusion
contributes to poverty alleviation.6 These results
are consistent with findings from macro-level stu-
dies (see, e.g. Bruhn and Love 2014; Burgess,
Pande, and Wong 2005). Further, comparing the
effects of financial inclusion with other control
variables, we observe that the effects of financial
inclusion are relatively stronger compared to most
control variables including gender, education,
ownership of land, employment status and religion.
Thus, the effects of financial inclusion on poverty
are not only statistically significant but are also
economically meaningful and have practical
relevance.
However, OLS results are biased in the presence
of endogeneity. Thus, for robustness, we report
2SLS results using distance to nearest financial
institution as instrument in Table 2. Here,
Columns 1 to 3 report results using our external
instrument only while Columns 4 to 6 report
Lewbel 2SLS results which combine both external
and internal instruments.7 Comparing 2SLS and
OLS results, we find that endogeneity causes
a downward bias in OLS estimates given that the
effects of financial inclusion in 2SLS results are
considerably higher. Specifically, 2SLS results sug-
gest that a standard deviation increase in financial
inclusion is associated with increases of 0.740 (vs.
0.026 in OLS) and 0.656 (vs. 0.160 in OLS) stan-
dard deviations in PPI scores and the number of
people above the poverty line, respectively.
Similarly, a standard deviation increase in financial
inclusion is associated with a decline of 0.832 (vs.
0.017 in OLS) standard deviations in the level of
household deprivation. Effects of financial inclu-
sion from Lewbel 2SLS results with internal and
external instruments are considerably lower than
results from the standard IV with distance to near-
est financial institution as instrument, however,
compared with OLS results, they are relatively
6 S. A. CHURCHILL AND V. B. MARISETTY

Table 1. Financial inclusion and poverty (Baseline results). inclusion remains valid. We perform PSM using
(1) (2) (3) multiple algorithms (i.e. nearest neighbour, radius,
PPI Score Deprivation Poverty Line
Financial Inclusion 0.015*** −0.011*** 0.210*** kernel and local linear regression matching meth-
(0.003) (0.002) (0.030) ods) to ensure that our results are robust. Our
[0.026] [−0.017] [0.160]
Male −0.004** −0.000 −0.015 results, which are summarized in Table 3 suggest
(0.002) (0.002) (0.025) that for effects of financial inclusion on PPI scores,
[−0.010] [−0.000] [−0.015]
Age 0.000*** −0.000 −0.000 the average treatment effect on the treated (ATT)
(0.000) (0.000) (0.001) across all PSM algorithms is between 0.013 and
[0.021] [−0.002] [−0.001]
Rural −0.006*** 0.020*** −0.085*** 0.015. For effects on household deprivation scores,
(0.002)
[−0.014]
(0.002)
[0.038]
(0.026)
[−0.083]
the ATT is between −0.009 and 0.016, while for
Married 0.000 −0.008*** 0.046* effects on poverty line, the ATT is between 0.029
(0.002) (0.002) (0.025)
[0.001] [−0.015] [0.045] and 0.035. These results are consistent with our
Children −0.003*** 0.010*** −0.032** baseline results and more importantly confirm that
(0.001) (0.001) (0.014)
[−0.022] [0.059] [−0.099] financial inclusion helps in poverty reduction.
Household size −0.044*** −0.006*** −0.448*** Lastly, we examine the robustness of our results
(0.001) (0.001) (0.010)
[−0.440] [−0.048] [−0.801] to alternative measures of financial inclusion.
Primary 0.006** −0.013*** −0.086** Specifically, we focus on the individual compo-
(0.003) (0.002) (0.035)
[0.010] [−0.019] [−0.065] nents of financial inclusion which constitute the
−0.360***
Secondary 0.012***
(0.002) (0.002)
0.010
(0.029)
multi-dimensional financial inclusion indicator.
[0.028] [−0.735] [0.011] We examine the effects of access to bank, access
Tertiary 0.038*** −0.382*** 0.346***
(0.004) (0.003) (0.046) to loan, and access to insurance individually on our
[0.049] [−0.436] [0.203] outcome variables. Results from this exercise are
Farm Land −0.009*** 0.004** −0.058**
(0.002) (0.002) (0.025) reported in Table 4. Panel 1 of Table 4 reports
[−0.021] [0.008] [−0.059] results for the effects of financial inclusion proxied
Employed −0.002 0.009*** −0.068***
(0.002) (0.002) (0.026) by access to bank only, while Panel 2 reports effects
[−0.004] [0.018] [−0.067] for access to loan or credit. Panel 3 reports effects of
Self-employed 0.016*** −0.005* 0.051
(0.004) (0.003) (0.043) access to insurance. Results here suggest that the
Christian
[0.020]
0.006
[−0.006]
0.039***
[0.028]
−0.074
individual dimensions of financial inclusion help in
(0.012) (0.011) (0.150) reducing poverty. This finding is consistent across
[0.004] [0.023] [−0.022]
Muslim −0.014 0.062*** −0.281** all columns of each panel except Column 2 of Panel
(0.011) (0.010) (0.136) 2 where the effect of access to credit is statistically
[−0.021] [0.080] [−0.185]
Sikh 0.076*** −0.011 0.651*** insignificant. Comparing standardized coefficients
(0.014) (0.012) (0.170) across each panel, we find that the effects of access
[0.051] [−0.007] [0.199]
Hindu −0.025** 0.063*** −0.335** to insurance is the strongest, followed by access to
(0.011) (0.010) (0.132) bank (which includes services such as owning
[−0.044] [0.098] [−0.265]
Buddhist 0.026** 0.056*** 0.040 a savings account, checking account or fixed
(0.013) (0.012) (0.159)
[0.013] [0.025] [0.009]
deposit account), and lastly, access to credit.
Constant 0.792*** 0.431*** 2.224*** Given that households that have access to credit
(0.013) (0.011) (0.167)
State fixed effect Yes Yes Yes might automatically have access to banking ser-
Observations 44,705 44,705 44,705 vices as well, it might be the case that there is
R-squared 0.253 0.595 0.121
a high correlation between these two dimensions
Columns 1 and 2 report OLS results while Column 3 reports logit results.
Robust standard errors adjusted for heteroskedasticity in parentheses. of financial inclusion. Thus, in an additional test,
Standardized coefficients in brackets. we drop access to bank and only include access to
***p < 0.01, **p < 0.05, *p < 0.1.
credit and insurance in our composite index to
examine if our results are robust. These results
higher as well, except in Column 6. This confirms are reported in Panel 4 of Table and are consistent
the downward bias in OLS results. with our main findings.
Turning to PSM results, we find that the emerging We now turn towards understanding the house-
conclusion regarding the effects of financial hold beneficiaries of financial inclusion, especially
 APPLIED ECONOMICS 7

Table 2. Financial inclusion and poverty (2SLS Regressions).

2SLS with external instrument Lewbel 2SLS
(1) (2) (3) (4) (5) (6)
VARIABLES PPI Score Deprivation Poverty Line PPI Score Deprivation Poverty Line
Financial Inclusion 0.641*** −1.533*** 0.821* 0.020*** −0.022*** 0.036**
(0.249) (0.485) (0.444) (0.006) (0.005) (0.014)
[0.740] [−0.832] [0.656] [0.036] [−0.034] [0.029]
State fixed effect Yes Yes Yes Yes Yes Yes
Controls? Yes Yes Yes Yes Yes Yes
Observations 39,065 39,065 39,065 39,065 39,065 39,065
First stage
Time to bank −0.010*** −0.008***
(0.003) (0.003)
Partial R-squared 0.238 0.390
F-statistic 10.57 63.38
Columns 1 to 3 present 2SLS results using time to nearest bank as instrument.
Columns 4 and 6 represent Lewbel 2SLS results that combine internal and external instruments.
Robust standard errors adjusted for heteroskedasticity in parentheses.
Standardized coefficients in brackets.
***p < 0.01, **p < 0.05, *p < 0.1.

Table 3. PSM results with different matching methods.
ATT (average treatment effect on
the treated)
Poverty
Matching method PPI Score Deprivation level
1 – Nearest Neighbour (one-to-one) 0.013*** −0.009*** 0.029***
(0.001) (0.003) (0.010)
4 – Nearest Neighbour 0.015*** −0.013*** 0.034***
(0.001) (0.002) (0.001)
Radius 0.014*** −0.012*** 0.035***
(0.003) (0.003) (0.003)
Kernel 0.015*** −0.016*** 0.035***
(0.003) (0.003) (0.003)
Local linear regression 0.014*** −0.014*** 0.032***
(0.004) (0.003) (0.003)
Baseline results for comparison 0.015*** −0.011*** 0.210***
(0.003) (0.002) (0.030)
Notes: ***represent significant at the 1 per cent level.
Bootstrapped standard errors in parentheses.
through the strongest channel – insurance. Access
to insurance benefits households by improving
their resilience, providing better access to critical
services and improving entrepreneurial activities.
Dercon and Christiaensen (2007) argue that low-
income households are more exposed to risks and
less able to deal with them. They often resort to
strategies that are expensive and inefficient to man-
age risks. Likewise, Carter and Barrett (2006)
report that insurance improves insured parties’
resilience to shocks by providing them with an
efficient means to manage risk and avoid welfare-
reducing risk-coping strategies such as disposing of
productive assets or depleting savings.
Table 5 presents distributions with regards to
access to insurance, banking and loans. It is clear
from the table that self-employed or entrepreneurs
did not benefit much from financial inclusion, as
they have the least insurance access as well as access
to banking and loan. Insurance access is only 11%
while access to banking and loans is 8% and 13%,
respectively, for self-employed households. However,
households in rural areas and those below the poverty
line, appear to have benefitted from financial inclu-
sion across all dimensions with at least 50% of house-
holds in these categories recorded as beneficiaries of
insurance, banks and loans. Similarly, households
with farmland (which are often households in rural
areas) tend to benefit as well from financial inclusion.
This suggests that plans to target poor households and
those in rural areas appear to be effective, thus
explaining the poverty-reduction effect of financial
inclusion.
V. Conclusion
Using new nationally representative survey data, we
examine the impact of financial inclusion on poverty
in India. We measure financial inclusion multidi-
mensionally and examine effects on three measures
of poverty including household deprivation scores,
household Poverty Probability Index (PPI), and
a binary variable capturing households below (and
above) the poverty line. Our results suggest that
financial inclusion contributes to poverty allevia-
tion. This finding is consistent with existing studies
that found that financial development and financial
inclusion is effective for poverty reduction and
higher income among poor households (see, e.g.
Chibba 2009; Jalilian and Kirkpatrick 2005; Zhang
and Posso 2017).
8 S. A. CHURCHILL AND V. B. MARISETTY

Table 4. Financial inclusion and poverty (Analysis by financial inclusion dimensions).

(1) (2) (3)
PPI Score Deprivation Poverty Line
Panel 1: Effects of access to bank
Financial inclusion 0.009*** −0.008*** 0.070***
(0.002) (0.002) (0.024)
[0.020] [−0.015] [0.070]
State fixed effect Yes Yes Yes
Controls? Yes Yes Yes
Observations 44,705 44,705 44,705
R-squared 0.253 0.595 0.120
Panel 2: Effects of access to loan/credit
Financial inclusion 0.005* 0.001 0.073**
(0.003) (0.002) (0.036)
[0.007] [0.001] [0.045]
State fixed effect Yes Yes Yes
Controls? Yes Yes Yes
Observations 44,705 44,705 44,705
R-squared 0.253 0.594 0.121
Panel 3: Effects of access to insurance
Financial inclusion 0.021*** −0.018*** 0.260***
(0.003) (0.002) (0.035)
[0.031] [−0.024] [0.171]
State fixed effect Yes Yes Yes
Controls? Yes Yes Yes
Observations 44,705 44,705 44,705
R-squared 0.253 0.595 0.121
Panel 4: Access to credit and insurance (composite)
Financial inclusion 0.020*** −0.020*** 0.257***
(0.004) (0.003) (0.049)
[0.038] [−0.034] [0.219]
State fixed effect Yes Yes Yes
Controls? Yes Yes Yes
Observations 44,705 44,705 44,705
R-squared 0.265 0.594 0.125
Robust standard errors adjusted for heteroskedasticity in parentheses.
Standardized coefficients in brackets.
***p < 0.01, **p < 0.05, *p < 0.1.

Table 5. Distribution of household access to financial inclusion variables.

Percentage with insurance Percentage without insurance
PANEL A: HOUSEHOLD LEVEL ACCESS TO INSURANCE DISTRIBUTION
Self-employed respondents 11.54 88.46
Respondents with farmland 41.85 58.15
Respondents below poverty line 59.86 40.14
Respondents in rural area 56.86 43.14
Percentage with access to bank Percentage without access
PANEL B: HOUSEHOLD LEVEL ACCESS TO BANKING DISTRIBUTION
Self-employed respondents 8.32 91.68
Respondents with farmland 42.19 57.81
Respondents below poverty line 66.82 33.18
Respondents in rural area 68.54 31.46
Percentage with access to loan Percentage without access
PANEL C: HOUSEHOLD LEVEL ACCESS TO LOANS DISTRIBUTION
Self-employed respondents 13.55 86.45
Respondents with farmland 50.20 49.80
Respondents below poverty line 63.23 36.77
Respondents in rural area 68.92 31.08
Self-employed respondents 13.55 86.45

We argue that financial inclusion is likely to work compared to access to bank accounts and credit. This
through a number of mechanisms to contribute finding could be explained by the fact that poor and
towards poverty reduction. Our findings suggest that vulnerable households are often excluded and left
access to insurance has the strongest effect on poverty with less coping strategies to income shocks (Zhang

and Posso 2017), and this exacerbates issues of pov-
erty. However, with financial inclusion, particularly
access to insurance, their resilience against such
income shocks increases and provides them with
opportunities to move out of poverty.
Beyond insurance, the effects of access to bank
accounts suggest that improving access to various
accounts including savings accounts empowers
poor households and encourages investments in
human capital that can help with poverty reduction
(Ashraf, Karlan, and Yin 2010). Similarly, the
effects of access to credit could be explained by
the literature that relates credit access to increase
in consumption, income, health and wage earning
opportunities, all of which are relevant for poverty
reduction (see, e.g. Banerjee et al. 2015).
Overall, our results present some implications for
policy. Statistics from the World Bank indicates that
about 22% of the Indian population still live in pov-
erty, suggesting that one in five Indians is poor. The
findings from this study therefore suggest that finan-
cial inclusion is a viable approach to help reduce
current levels of poverty. The push towards financial
inclusion in India is thus, a step in the right direction.
Policymakers need to consider the continual promo-
tion of financial inclusion as a way to alleviate poverty
and improve household welfare.
Disclosure statement
No potential conflict of interest was reported by the authors.
ORCID
Sefa Awaworyi Churchill http://orcid.org/0000-0002-
1930-9177
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 APPLIED ECONOMICS 11

Appendix

Table A1. Dimensions, indicators and weights for multidimensional poverty.

Dimension (weight) Deprived if . . . (weight)
Education (1/3) Household head has less than 5 years of education (1/6)
Any school age child is not going to school (1/6)
Health (1/3) Household member needed a doctor but delayed or did not go because of funds in the last 6 months (1/6)
Household has gone without enough food to eat because of funds in the last 6 months (1/6)
Standard of Living (1/3) The household does not have a refrigerator (1/18)
The household does not have a stove/gas burner (1/18)
The household does not have a television (1/18)
The household does not have an electric fan (1/18)
The household does not have a chair, stool, bench, or table (1/18)
The household does not have a motorcycle, scooter, motor car, or jeep (1/18)

Table A2. Dimensions, indicators and weights for multidimensional financial inclusion.
Dimension (weight) Financially deprived if . . .
Bank (1/3) Household does not have a bank account (bank account includes savings, current, fixed deposit or microfinance account)
Loan/Credit (1/3) Household does not have access to loan/credit from bank, microfinance institution or other formal institution
Insurance (1/3) Household does not have access to medical, life, property, unemployment/income or family insurance

Table A3. Description and summary statistics of variables.

Household
Full sample head sample
Variable Description Mean SD Mean SD
PPI Score Poverty Probability Index on a 0 to 1 scale 0.480 0.215 0.502 0.217
Deprivation Deprivation score based on multi-dimensional poverty indicators 0.386 0.243 0.401 0.247
Poverty Line Dummy variable equals 1 if income lived on is more than $2.50 per day 0.346 0.476 0.376 0.484
Financial Dummy variable equals 1 if household financial deprivation score is less than 0.5 0.156 0.363 0.199 0.399
Inclusion
Bank access Dummy variable equals 1 if household has access to a bank 0.631 0.482 0.706 0.456
Loan access Dummy variable equals 1 if household has access to loan/credit 0.098 0.297 0.117 0.322
Insurance access Dummy variable equals 1 if household has access to insurance 0.110 0.313 0.142 0.349
Household size Number of people in household 4.142 2.124 3.677 1.958
Male Dummy variable equals 1 if respondent (or household head in household head sample) is male 0.466 0.498 0.818 0.386
Age Age of respondent (or household head in household head sample) 37.971 14.856 45.142 13.495
Rural Dummy variable equals 1 if household lives in rural area 0.690 0.462 0.697 0.459
Married Dummy variable equals 1 if respondent (or household head in household head sample) is married 0.693 0.461 0.773 0.419
Children Number of children in household 1.235 1.464 1.070 1.383
Primary Dummy variable equals 1 if highest level of education of respondent (or household head in household 0.148 0.356 0.175 0.380
head sample) is primary education
Secondary Dummy variable equals 1 if highest level of education of respondent (or household head in household 0.459 0.498 0.439 0.496
head sample) is secondary education
Tertiary Dummy variable equals 1 if highest level of education of respondent (or household head in household 0.084 0.278 0.074 0.261
head sample) is tertiary education
Farm Land Dummy variable equals 1 if household owns a farm land 0.394 0.489 0.405 0.491
Employed Dummy variable equals 1 if respondent (or household head in household head sample) is employed 0.328 0.469 0.524 0.499
Self-employed Dummy variable equals 1 if respondent (or household head in household head sample) is self- 0.075 0.263 0.123 0.328
employed
Christian Dummy variable equals 1 if respondent (or household head in household head sample) is Christian 0.021 0.144 0.023 0.151
Muslim Dummy variable equals 1 if respondent (or household head in household head sample) is Muslim 0.109 0.312 0.102 0.303
Sikh Dummy variable equals 1 if respondent (or household head in household head sample) is Sikh 0.021 0.145 0.018 0.132
Hindu Dummy variable equals 1 if respondent (or household head in household head sample) is Hindu 0.827 0.378 0.838 0.368
Buddhist Dummy variable equals 1 if respondent (or household head in household head sample) is Buddhist 0.012 0.108 0.012 0.109
Time to bank Log of average time taken from residence to nearest financial institution 3.303 0.606 3.309 0.610
12 S. A. CHURCHILL AND V. B. MARISETTY

Table A4. Financial inclusion and poverty (Household head sample).

(1) (2) (3)
VARIABLES PPI Score Deprivation Poverty Line
Financial Inclusion 0.020*** −0.019*** 0.258***
(0.004) (0.003) (0.045)
[0.036] [−0.031] [0.212]
Male −0.007 −0.003 −0.023
(0.005) (0.004) (0.054)
[−0.012] [−0.004] [−0.018]
Age 0.000*** −0.000 0.001
(0.000) (0.000) (0.001)
[0.027] [−0.006] [0.025]
Rural −0.011*** 0.019*** −0.129***
(0.004) (0.003) (0.043)
[−0.024] [0.035] [−0.122]
Married −0.009** −0.008** 0.028
(0.004) (0.003) (0.048)
[−0.017] [−0.014] [0.025]
Children −0.002 0.010*** −0.022
(0.002) (0.002) (0.025)
[−0.011] [0.058] [−0.064]
Household size −0.049*** −0.007*** −0.430***
(0.001) (0.001) (0.018)
[−0.449] [−0.057] [−1.740]
Primary 0.003 −0.009** −0.115**
(0.004) (0.004) (0.053)
[0.005] [−0.014] [−0.091]
Secondary 0.014*** −0.359*** 0.015
(0.004) (0.003) (0.046)
[0.032] [−0.715] [0.016]
Tertiary 0.049*** −0.385*** 0.396***
(0.007) (0.006) (0.076)
[0.060] [−0.406] [0.215]
Farm Land −0.003 0.003 −0.002
(0.003) (0.003) (0.041)
[−0.007] [0.005] [−0.002]
Employed −0.003 0.001 −0.099**
(0.003) (0.003) (0.041)
[−0.007] [0.003] [−0.102]
Self-employed 0.007 −0.007* −0.048
(0.005) (0.004) (0.060)
[0.011] [−0.009] [−0.033]
Christian 0.027 0.008 0.263
(0.021) (0.019) (0.265)
[0.019] [0.005] [0.082]
Muslim 0.010 0.033* 0.047
(0.019) (0.019) (0.249)
[0.014] [0.040] [0.030]
Sikh 0.105*** −0.034 0.935***
(0.025) (0.022) (0.306)
[0.065] [−0.018] [0.256]
Hindu −0.005 0.038** −0.011
(0.019) (0.018) (0.242)
[−0.008] [0.056] [−0.009]
Buddhist 0.049** 0.019 0.445
(0.022) (0.021) (0.279)
[0.025] [0.008] [0.100]
Constant 0.786*** 0.486*** 1.666***
(0.023) (0.021) (0.291)
Observations 16,641 16,641 16,641
R-squared 0.267 0.597 0.113
Columns 1 and 2 report OLS results while Column 3 reports logit results.
Robust standard errors adjusted for heteroskedasticity in parentheses.
Standardized coefficients in brackets.
***p < 0.01, **p < 0.05, *p < 0.1.